Oligopoly

A market may operate either under perfect competition or under imperfect competition. Imperfect competition may take the form of monopoly or monopolistic competition. Under monopoly there is no competition at all. But under monopolistic competition there exists stiff competition among a large number of firms producing close substitutes. In between monopoly and monopolistic competition there is third form of market, known as ‘Oligopoly.’

The term ‘Oligopoly’ has been derived from Greek words, ‘Oilgoi’ which means a few and ‘Poleein’ means to sellers. When sellers are a few, the market share of one seller would be substantial. As a result, the price-output policy of one affects the others. Thus we can define oligopoly as “a market structure where a few sellers compete with each other and each controls a significant portion of market so that the price-out policy of one affects the other.”

Under oligopoly, the product may be either homogeneous or differentiated. So we have two types of oligopoly.

Pure Oligopoly

When all the existing firms in the industry produce identical or homogeneous products, we say it is ‘pure oligopoly ‘without product differentiation.’

Differentiated Oligopoly

When the products of the firms are differentiated but are close substitutes of each other. We say it is “differentiated oligopoly.”

In summary, we can identify an oligopoly type of market by

• Few number of firms in the market.
• Difficult for the new firms to enter.
• The product is either homogeneous or it differentiated, are close substitutes. If there are only two sellers in the market we call it ‘Duopoly.’ When there are large number of small firms and one dominant firm in a group who takes the major decisions in the industry, it is called “price-leadership.”